PETROECUADOR PRESIDENT RESIGNS OVER DECLINING

C O N F I D E N T I A L QUITO 000464 SIPDIS TREASURY FOR MEWENS DEPT FOR WHA/EPSC FAITH CORNEILLE E.O. 12958: DECL: 05/29/2018 TAGS: EPET ECON EINV DOD EC SUBJECT: PETROECUADOR PRESIDENT RESIGNS OVER DECLINING PRODUCTION; ANOTHER NAVY ADMIRAL TAKES OVER REF: A. 07 QUITO 2575 ¶B. 06 QUITO 1920 Classified By: DCM Jeff Brown, Reasons 1.4 (b) and (d). ¶1. (U) Summary: Following harsh words from President Correa about state oil company Petroecuador's inability to meet petroleum production projections, its President Fernando Zurita resigned on May 20. He was replaced by another Navy Admiral, Luis Jaramillo, who will attempt to increase production in spite of Petroecuador's difficulties in spending its investment budget. End Summary. ¶2. (U) On May 19, Correa attended a Petroecuador board meeting at which he expressed displeasure over reduced petroleum production numbers and unrealized planned investment. ¶3. (U) On May 20, Zurita resigned, saying that Petroecuador's "executive priorities are not satisfying the President's expectations." Zurita, a Navy Admiral, was appointed by Correa to replace the previous Petroecuador president in November 2007. He was appointed under a presidential mandate that allows the Navy to manage Petroecuador in an attempt to root out corruption (ref A). On May 21, another Navy Admiral, Luis Jaramillo, was named to replace Zurita. Jaramillo previously headed up Ecuador's maritime authority and was only recently promoted to the rank of admiral. Before that he was head of Ecuador's naval academy, and served in various other positions within the Navy. Although he has spent 28 years in the Navy, he does not have petroleum experience (a fact that the Petroecuador unions say should disqualify him from becoming president). Unmet Production and Investment Goals -------------- ¶4. (U) Prior to its meeting with Correa, Petroecuador had lowered its projected 2008 production for Petroproduccion from 185,000 barrels per day (bpd) to 172,000 bpd. The new projections, if met, would imply only a 1% increase over 2007, when production averaged 170,000 bpd. Current production is approximately 167,000 bpd. In addition, only 12% of a planned annual investment budget of $2 billion has been spent to date (and 10% more has been contracted). (Note: These production and investment numbers exclude Occidental Petroleum's former Block 15, where production recovered in 2008 after dropping for much of 2007.) ¶5. (U) Zurita claimed natural declines in mature wells were underestimated for 2008 and should have been measured at 16% instead of 8%, and production of other wells had been overestimated. In addition, he noted that Petroecuador has not yet been able to obtain the drilling rigs it had planned to use. ¶6. (SBU) Petroecuador has faced major difficulties in implementing its investment plans. Petroleum industry representatives have said that drilling rigs have been leaving the country. They claim rigs are scarce worldwide. Only one of two rigs promised by PDVSA of Venezuela has arrived in Ecuador to begin drilling. One petroleum services company noted that firms, even though they are hungry for work, are reluctant to bid on contracts with Petroecuador because the contracts are poorly written and subject to frequent changes. In addition, the state oil company faces opposition from its powerful unions, which benefit from the current corrupt system (ref B) and are said to be blocking efforts to make management changes and award contracts in a transparent manner. COMMENT: -------------- ¶7. (C) With an increased investment budget, Petroecuador has come close to stabilizing production in its mature fields (in itself an accomplishment since Petroecuador production had been falling for years) but has not yet increased production. Petroecuador's inability to fully spend its investment budget implies the GOE's plan to reform Petroecuador and improve production (by having Navy leadership make management changes and eliminate corruption) has not been fully realized. Instead, Petroecuador suffers from institutional weaknesses that inhibit it from implementing the government's ambitious infrastructure plans - problems that plague other parts of the government as well - that cannot be easily fixed by a few changes at the top and dictates from the Presidency. ¶8. (C) Post has had prior contact with Jaramillo, who appears capable and accessible but lacks experience in the petroleum sector. Navy contacts suggest that naval officials do not want the Petroecuador presidency job but the Navy is required to fill it by Presidential decree. With this scenario, and a lack of petroleum background, it seems unlikely that the new appointment will improve Petroecuador's situation. Jewell